How To Lose Your Tax-Exempt Status

The Internal Revenue Service or IRS classifies schools, churches and organizations that provide medical or hospital care as public charities and are automatically tax exempt or classified as 501(c)(3) tax exempt organizations. Other organizations that are also exempt from tax are those that have a significant support from the public or are those that support other public charities. A public charity, unlike private foundations, has a broad source of support.  An entity that has a tax exempt status will benefit by being exempted from federal income tax, will have reduced postal rates, will possibly be exempted from state income, exempt from sales and employment taxes, will be exempt from federal unemployment tax, tax exempt financing and have tax deductible contributions. Once your organization gains the status of being tax exempt, it must try to maintain it by being careful not to engage in activities that might penalize your organization and lose its tax exempt status. These are some of the ways how you might lose your tax-exempt status.

  1. Engage in activities that will benefit an individual or organization’s private interest. As a public charity, your activities cannot benefit an individual or the organization’s private interest. The income gained should not go to individuals within that entity but instead be used by the organization for their activities. If the organization’s operations are found to provide private benefit to an individual then that organization will lose its tax-exempt status.
  2. Let the organization engage in lobbying. The organization will definitely lose its tax exempt status if found to engage in lobbying. When an organization rallies the public to support or oppose legislation and engages in a lot of activities that tries to influence legislation, the organization will be stripped of its tax exempt position.
  3. Participate in political campaigns. Making contributions to a politician’s campaign fund and go public to support the politician will endanger your tax exempt status. Even taking part in opposition to a candidate running for public office is prohibited. Political candidates may be invited by the organization to speak at an event but has to make sure that all the candidates running for the same position are also invited and that the event is not a fundraiser. No suggestions can be made by the organization to support or oppose a certain political candidate.

These are just some ways an organization can put their tax-exempt status at risk. The organization must be careful with all its activities and make sure it understands the rules that apply to its status.


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